Much has been written about the for-profit educational stocks over the past few months. In fact, it has caused me to take a long, hard look at the group for value among the wreckage. This group has been highly profitable, but it remains to be seen whether that is sustainable. Once this industry loses a potential funding source (government provided student loans) it loses its ability to fund operations. This is somewhat similar to a financial institution that loses its funding source – very difficult to survive. Clearly student lending isn’t going away, but the players within the industry are all affected. For the survivors, there is great potential.
Below is a small representation of the group;
Ticker YTD
Apollo Group -34%
Strayer Education -26%
Devry -31%
Corinthian Colleges -62%
The group has taken a beating. When an industry is confronted with such an event it reminds us what downside risk can really mean. It may have very little to do with one particular name in the group, but when the news is bad all are impacted. This gives us potential opportunity. But it also highlights risk which we may not appropriately consider in our evaluation process.
My focus in this piece is asking the question – how much downside can we tolerate or should we accept? I believe that arriving at mental price stops are a useful tool to answer this question before we make any investment. Mental price stops are not actual stop-limit orders placed with a broker. They are simply a downside numbers where we might consider taking losses on our investment. I realize that many value investors (including myself) might say if the price drops – just buy more at better prices. This may be appropriate in some cases. As always, decisions are made on a case by case basis. Each situation is unique. However, there are many times when things are happening and events are unfolding which are simply beyond our scope of information. There is no shame in admitting this fact to ourselves. We cannot gather every single piece of information when doing our due diligence. Of course we always strive to have complete and thorough research, but occasionally we miss something vital or just don’t understand the issues properly.
The mental stop is an unemotional way to force discipline upon our process. It will also help us adhere to the golden rule of investing – don’t lose money.
